1. Transactions That Affect Assets, Liabilities, and Owner’s Equity
Chapter 4
Transactions That Affect Assets, Liabilities, and Owner’s Equity
Making Accounting Relevant
Accounting and finance professionals are key to every business operation.
Accounting and finance staff are key employees in any business.
Without financial records the business owner would not know the amounts earned or spent.
Accountants and accounting staff:
Record business transactions
Summarize the financial results
Stockholders want to know about a corporation’s revenue, expenses, and increases or decreases to equity
How might the work performed by the accountant affect the day-to-day decisions made by the business owner?

2. What You Will Learn How to use T accounts Why you need a ledger
The rules of debit and credit

3. Why It’s Important Key Terms Chapter 4
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Why It’s Important
The rules of debit and credit are the basis for entering transactions into the records of a business.
Key Terms
ledger
chart of accounts
double-entry accounting
T account
debit
credit
normal balance

4. Ledger Accounts are grouped together in a ledger
Manual or electronic system
Known as “keeping the books”
Grouping accounts makes info easy to find
Info taken from ledger is organized into reports to provide financial statements

5. Roadrunner Delivery Service
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
The Chart of Accounts
A list of all the accounts and their assigned account numbers.
Roadrunner Delivery Service
155 Gateway Blvd.
Sacramento, CA 94230
CHART OF ACCOUNTS
ASSETS 101 Cash in Bank
105 Accounts Receivable--City News
110 Accounts Receivable--Green Company
115 Computer Equipment
120 Office Equipment
125 Delivery Equipment
LIABILITIES 201 Accounts Payable--Beacon Advertising
205 Accounts Payable--North Shore Auto
OWNER’S EQUITY 301 Maria Sanchez, Capital
302 Maria Sanchez, Withdrawals
303 Income Summary
REVENUE 401 Delivery Revenue
EXPENSES 501 Advertising Expense
505 Maintenance Expense
510 Rent Expense
515 Utilities Expense
The number of accounts needed depends on size of the business
Small business may require only 20 – 30 accounts (florist)
Large business may have several thousand accounts (Boeing)
Numbering system makes it easy to locate individual accounts in the ledger
Account numbers have two or more digits
Small company may use a three digit system
Very large corporation may have 35 or more digits in its account numbers
Used for sorting info based on kind of report needed
TYPICAL ACCOUNTS:
Asset accounts begin with 1
Liability accounts begin with 2
Owner’s equity accounts begin with 3
Revenue accounts begin with 4
Expense accounts begin with 5

6. Double-Entry Accounting
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Double-Entry Accounting
Double-entry accounting is a system of recordkeeping in which each business transaction affects at least two accounts.
What we did in Ch. 3 analyzing and recording changes in account balances works well if a business has very few accounts
However, if a business has many accounts and transactions to analyze a “double-entry accounting” system of recordkeeping is needed

7. T Accounts Chapter 4 Account Name Left Side Right Side
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
T Accounts
The T account, so called because of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction.
Account Name
Left Side Right Side
Debit Side Credit Side
Debit Credit
Helps the accountant analyze the parts of a business transaction
T account has a place for an account name, a left side, and a right side
Top of the T is used for account name
LEFT side is ALWAYS used for DEBIT amounts
RIGHT side is ALWAYS used for CREDIT amounts
The words debit and credit are simply accountant’s terms for left and right

8. Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
The Rules of Debit and Credit
The rules of debit and credit vary according to whether an account is classified as an asset, a liability, or an owner’s capital account.
Normal balance is always on the side used to record increases to the account. The word normal used here means usual.
Debits and credits are used to record the increase or decrease in each account affected by a business transaction
For each debit entry made in one account, a credit of an equal amount must be made in another account
Regardless of the type of account:
the LEFT side of an account is always the DEBIT side
the RIGHT side of an account is always the CREDIT side
NORMAL BALANCE is always on the side used to record increases to the account…NORMAL BALANCE will be shaded in the textbook

9. Remembering Accounting Rules (alore)
LEFT Hand
Assets and expenses: the two outside fingers are + -
Liabiities, owners’s equity, and revenue: the three middle fingers - +

10. Rules for Asset Accounts
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Rules for Asset Accounts
Assets
Debit +
(1) Increase Side
(3) Normal Balance
Credit –
(2) Decrease Side
For asset accounts the
INCREASE side is the DEBIT (left) side of the T account
DECREASE side is the CREDIT (right) side of the T account
Notice the + and – signs…
These signs are used to indicate the INCREASE and DECREASE sides of the account
THEY DO NOT MEAN THE SAME THING AS DEBIT AND A CREDIT…do not equate these signs with debit and credit
Since the INCREASE side of an asset account is always the DEBIT side, asset accounts have a NORMAL DEBIT BALANCE.
FOR EXAMPLE: in the normal course of business, total increases to assets are larger than total decreases. You would expect an asset account, then, to have a normal debit balance
Asset accounts are increased by debits, so they normally carry a debit balance

11. RULES FOR ASSET ACCOUNTS
An ASSET account is INCREASED (+) ON the DEBIT side (left side)
An ASSET account is DECREASED (-) on the CREDIT side (right side)
The NORMAL BALANCE for an ASSET account is the INCREASE SIDE (debit side)
ASSETS normally have DEBIT balances

12. Chapter 4 Cash in Bank Debit + 200 150 350 Balance 240 Credit – 70 40
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Cash in Bank
Debit +
200
150
350
Balance 240
Credit – 70 40
110
Let’s apply the rules
The increases in the account are recorded on the LEFT, or DEBIT, SIDE
The DECREASES in the account are recorded on the RIGHT, or CREDIT, side
TOTAL DEBITS equal $350 ($200 + $150)
TOTAL CREDITS equal $110 ($70 + $40)
To find the balance, subtract TOTAL CREDITS from TOTAL DEBITS ($350 - $110)
The DEBIT BALANCE is $240…The Normal Balance is posted on the INCREASE side for an Asset

13. Rules for Liability and Owner’s Capital Accounts
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Rules for Liability and Owner’s Capital Accounts
Liabilities
Debit Credit –
(2) Decrease
Side
(1) Increase
Owner’s Equity
Debit Credit
– +
(2) Decrease (1) Increase
Side Side
(3) Normal
Balance
Credit +
Increase
Side
(3) Normal
Balance
Credit +
(1) Increase Side
(3) Normal Balance
Liabilities and Owner’s Equity accounts are on the RIGHT side of the ACCOUNTING EQUATION
RIGHT sides of the T accounts for liabilities and owner’s capital are the increase sides
The RIGHT sides are the NORMAL BALANCE sides
For all three types of accounts, (Assets, Liabilities, and Owner’s Equity), the DEBIT side is always the LEFT side of the T account,
And the CREDIT side is always the RIGHT side
Notice, however that the INCREASE (+) and DECREASE (-) sides of the liability and owner’s capital accounts are on the
OPPOSITE side of the accounting equation from accounts classified as ASSETS
As a result, DEBIT and CREDIT rules on one side of the accounting equation—and the T accounts within it—
are MIRROR IMAGES of those on the other side

14. Rules for Liability and Owner’s Capital Accounts
INCREASED on the CREDIT side (right side)
DECREASED on the DEBIT side (left side)
The NORMAL BALANCE is on the INCREASE side, or the CREDIT side
Normally have CREDIT balances (right side)

15. Example: Chapter 4 Accounts Payable Debit Credit M. Sanchez, Capital
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Example:
Accounts Payable
Debit Credit
– +
100 75
375
M. Sanchez, Capital
Debit Credit
– +
350
200
550 (3) Normal
Balance
Credit +
1,500
2,500
4,000
Bal. 3,450
Credit +
200
175
375
Bal. 200
Let’s apply rules to actual accounts.
First, look at the entries in the T account for the liability account ACCOUNTS PAYABLE
The INCREASES in the account are recorded on the RIGHT side, or CREDIT, side.
The DECREASES in the account are recorded on the LEFT, or DEBIT, side
TOTAL CREDITS equal $375 ($200 + $175);
TOTAL DEBITS equal $175 ($100 + $75)
To find the balance, subtract the total debits from the total credits ($375 - $175).
The credit balance is $200
Now look at the entries in the T account for the owner’s equity account M. Sanchez, Capital
The rules for the capital account are the same as for a liability account
Increases to owner’s capital are recorded on the RIGHT, or CREDIT, side of the account
DECREASES are recorded on the LEFT, or DEBIT, side
The CAPITAL account has a normal credit balance
If you subtract the TOTAL DEBITS from the TOTAL CREDITS ($ $550), you have a credit balance of $3,450)

16. Look at top of page 76 in your textbook
ALSO: COPY ON BOARD FOR DISCUSSION (Acctg equation with Debit/Credit accounts on top of page 76 in textbook)
For all three types of accounts, (Assets, Liabilities, and Owner’s Equity), the DEBIT side is always the LEFT side of the T account,
And the CREDIT side is always the RIGHT side
Notice, however that the INCREASE (+) and DECREASE (-) sides of the liability and owner’s capital accounts are on the
OPPOSITE side of the accounting equation from accounts classified as ASSETS
As a result, DEBIT and CREDIT rules on one side of the accounting equation—and the T accounts within it—
are MIRROR IMAGES of those on the other side

17. Check Your Understanding
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Chapter 4
Check Your Understanding
Explain why the normal balance of an asset account is on the debit side of the account.
Since the INCREASE side of an asset account is always the DEBIT side, asset accounts have a NORMAL DEBIT BALANCE.
FOR EXAMPLE: in the normal course of business, total increases to assets are larger than total decreases. You would expect an asset account, then, to have a normal debit balance